The American Families Plan proposal released on September 13th, 2021 would reduce the estate and gift tax exemption from $11.7 Million ($23.4 Million for married couples) down to $5 Million ($10 Million for married couples) adjusted for inflation in 2022. Under current estate and gift tax rules, an individual can gift while living or pass at death $11.7 Million without paying estate or gift tax. Any amount above the exemption is taxed at 40%. Reducing the exemption to $5 Million is going to expose many more Americans and their heirs to an estate tax liability.
CG Planning Strategies – Consider gifting assets to children, grandchildren or other intended beneficiaries to reduce the taxable value of your estate. This strategy typically works best in situations when someone has amassed more assets than they will likely need throughout the remainder of their life or thru more advanced strategies discussed below.
CG Planning Strategies – Life insurance is an efficient vehicle to pay for estate taxes. For this strategy to be most effective, life insurance should be owned by an Irrevocable Life Insurance Trust (ILIT) which keeps the life insurance proceeds outside of the estate at death and provides liquidity to pay estate taxes due.
CG Planning Strategies – 529 Plans a married couple to front load up to $150,000 per beneficiary without reducing the lifetime gift exemption or future estate tax exemption. The total gift to 529 plans are only removed from the estate if both spouses survive for 5 years from the date the account was opened.
Family Limited Liability Companies (FLLC’s) and Family Limited Partnerships (FLP’s) are two popular vehicles that have been used to shift assets to younger family members in recent times. The basic concept is that a minority interest in a family business is illiquid, not controlling, and there is limited ability to sell to a third party. For example, these factors may allow a business owner to gift interest in a family business of say $1 Million to a family member but only $700,000 was recognized as a gift with all future appreciation removed from the estate thereby reducing future estate tax liability.
Another attractive feature of FLLC’s and FLP’s is the ability to gift 99% of the interest and therefor value of a family business to younger generations while still maintaining all or some control over the business. This is made possible by gifting 99% non-voting interest to younger family members while the original owner retains 1% voting interest, responsible for making managerial decisions along with the ability to buy other assets or sell the business all together.
The American Families Plan would disallow valuation discounts on transfers of nonbusiness assets, a loophole often used in the estate planning process. Nonbusiness assets include passive investments such as land not used in business, stocks, bonds and cash. The new legislation aims to remove the ability to take discounts on nonbusiness assets in FLLC’s and FLP’s but they remain attractive strategies for bona fide family businesses.
CG Planning Strategies – Consider FLLC or FLP for bona fide business assets to remove assets and future appreciation from estates above the estate tax threshold. Nonbusiness assets such as land or investments would need to be transferred before the tax proposal’s date of enactment in order to take advantage of valuation discounts.
The bill comes with various other estate planning issues and strategies to consider. Below are some other major items which by no means are all inclusive.
Intentionally Defective Grantor Trusts (IDGT’s) would be included in the grantor’s estate. Trust must be established and funded before the tax proposal’s date of enactment to remain outside grantor’s estate.
Having a meaningful understanding of your financial situation involves organizing all of the items that make up your financial life. Our client portal, CG Wealth Access, helps keep track of your assets & liabilities, investments and bank accounts, insurance policies, tax returns and estate planning documents. It’s a place where you can view your total financial picture with a digital safety deposit box for your important documents.
We anticipate that a change in tax policy will present a number of issues and we want to be ready to help you with strategies to mitigate those issues. Moving forward, your advisor or a member of our team may be reaching out asking for your help in gathering important information such as recent tax returns and estate planning documents. Furthermore, as we evaluate your situation and how the proposed tax law changes will affect you, we may request permission to speak with your CPA or estate planning attorney to discuss opportunities.
We are honored and humbled with the trust and confidence you have placed with CG Financial to achieve your lifelong financial goals. We are here to help navigate the proposed changes in tax policy. If you have any questions, please feel free to reach out to your advisor or a member of the team. We hope you have found this information useful and look forward to helping you meet your goals.
Please feel free to share this article with a friend, colleague or family member that may find this information useful.
Advisory Services offered through CG Advisory Services, an SEC Registered Investment Adviser. Securities offered through Geneos Wealth Management Inc. Member FINRA/SIPC.
